Buffett Moody's stake may have plunged $292 million on S&P suit

Published 7:44 pm, Wednesday, February 6, 2013

Warren Buffett's Berkshire Hathaway, owner of the largest stake in Moody's, may have lost almost $300 million on the holding this week as shares of the credit-ratings company plunged.

Moody's, the second-biggest provider of credit ratings, dropped 19 percent through Wednesday after larger rival Standard & Poor's said on Feb. 4 that it could face a U.S. lawsuit over inflated mortgage-bond ratings. Omaha, Nebraska-based Berkshire held 28.4 million Moody's shares, or about 13 percent of the firm, as of Sept. 30, according to data compiled by Bloomberg.

Berkshire remained Moody's biggest shareholder even as Buffett, 82, pared his stake from 48 million shares in 2009. He told the Financial Crisis Inquiry Commission in 2010 that Moody's wasn't alone in missing the collapse of the housing market and that he invested in the business because of the pricing power it gets from its "natural duopoly" with S&P, a unit of McGraw-Hill.

"He believes it's a good business with a wide economic moat and he's held onto the position for quite some time," Tom Lewandowski, an analyst at Edward Jones & Co., said Tuesday. He generally looks at such occasions as opportunities "to increase his stake."

Moody's tumbled $10.26 this week, the biggest two-day drop in almost four years, but it rose $2.40 to $47.49 in trading Wednesday. If Berkshire continues to own the same number of shares that it did at the end of September, the value of its holding in Moody's dropped by $291.5 million. The shares still have climbed 17 percent in the past 12 months.

Financial Crisis

The U.S. is seeking as much as $5 billion in penalties from New York-based McGraw-Hill as punishment for inflated credit ratings that Attorney General Eric Holder said were central to the financial crisis. While Moody's wasn't sued, a victory by the government would spur other lawsuits, according to Robert Piliero, a lawyer at Butzel Long in New York who's worked on structured-finance litigation.

Michael Adler, a spokesman for New York-based Moody's, declined to say whether the company may face a U.S. lawsuit. Buffett, Berkshire's chairman and chief executive officer, didn't respond to a request for comment sent to an assistant about whether the S&P lawsuit has changed his view of Moody's.

Buffett, in a 2010 Bloomberg Television interview ahead of a scheduled appearance before the FCIC, said Moody's had lost some of its competitive advantage.

`Bulletproof Franchise'

"What was once a bulletproof franchise may not be bulletproof," the billionaire said at the time. "It's still quite a franchise."

Moody's made the same error as competitors and investors in assuming that housing prices couldn't fall nationwide, Buffett said. "They made big mistakes, but who didn't during the housing bubble?"

Other top Moody's shareholders include Vanguard Group, ValueAct Holdings And Capital Group Companies, which also was the largest owner of McGraw-Hill as of Sept. 30, according to data compiled by Bloomberg.

David Einhorn, who runs the New York-based Greenlight Capital hedge fund, said in a May 2009 speech that he was betting against Moody's because ratings are "shunned" by investors. Einhorn, 44, declined to comment for this story.

Berkshire stock has gained 9.5 percent this year as Buffett's larger equity bets rallied. He has accumulated stakes exceeding $13 billion in both Coca-Cola and International Business Machines, and each stock has advanced more than 5 percent since Dec. 31.